7 Business Loan Application Mistakes and How to Avoid Them
Many psychologists believe the best predictor of future behavior is past behavior. And your past behavior plays a big role in a financial lender’s decision to give you money. That’s why you have to make sure your financial affairs are in order before you request to borrow funds for personal or business use.
Have you defaulted on a student loan or mortgage in the past seven years? If so, chances are you’ll have a hard time obtaining loan approval. But that’s not the only factor that determines the outcome of your loan application.
Keep reading to learn about seven common business loan application mistakes and how to avoid them.
1. Absence of a Business Plan
Before initiating the loan application process, prepare a thorough business plan. Include a market analysis, management team, and sales goals. Having a business plan also proves you’ve put thought into your company’s purpose and objectives, amongst other important factors.
Lack of a strong business plan is not only a costly business loan application mistake. Your business can fail if you don’t lay the proper foundation and build a strategy for success. Make sure your business plan addresses the following key points:
- Nature of your business
- Your plan to make money
- Your business and organizational structure
- Your promotional marketing strategy
- Your short- and long-term revenue projections
2. No Demonstrated Business Value
Your inability to prove your company’s value is another reason your application could get rejected. It may be a myth that more than half of new businesses fail during their first year. But it’s a possibility lenders consider when assessing loans for small businesses.
Your business plan is one way to demonstrate the value of your business. But to further reinforce your plan, prepare a business pitch. Address the current void in the market and how your business can help solve those problems.
3. Incomplete Documentation
For many hopeful business owners, the first impression they make on a business loan provider is via their loan application. Lenders scrutinize the details of a business loan application much more than one for personal use. So you have to make sure no information is missing or raises a red flag.
Another piece of important information to provide with a loan application is your company’s recent financial report. If you can show the success of your business, lenders are less likely to see you as a risk. Paint a financial picture that shows your ability to repay whatever loan amount you’re requesting
4. Insufficient Use of Funds
Consult your business plan to understand the need and strategy for using the funds The more concrete information you provide your prospective lender the greater your chance for approval. But your loan may get denied if you don’t give enough details for the lender to feel confident in your intended use of the funds.
Many business loans are used to cover start-up costs, like office space, equipment, and inventory. That’s great but once you’re established, lenders want to know what’s next. Be prepared to provide a summary of how you plan to grow your business with the help of additional funding.
5. Bad Credit
Some lenders don’t put too much weight on bad credit. But assuming your lender won’t give attention to your credit history is a big mistake. A credit report is often the best determinant of your creditworthiness.
But a period of bad credit doesn’t have to ruin your chances of ever obtaining a business loan. Just put effort toward repairing your credit in advance. Request a credit report and consult a credit expert for tips on how best to resolve credit issues before submitting a small business loan application.
6. Overlooking Loan Terms
If you put work into cleaning up your credit the last thing you want to do is default on a loan. This often happens when borrowers don’t understand the loan terms and conditions. Read every clause of your loan agreement, including the fine print.
The details of your contract dictate the type of business loan and your repayment schedule. Secured loans cost whatever financial assets you used for collateral. And delinquent payments on an unsecured loan could cost you your company if a lender decides to sue your business.
7. Not Comparing Loan Costs
The selection of loan options may feel overwhelming but should not be ignored. Not every small business owner finds a small business loan suitable for their business. Do your research on loan interest rates, fees, and repayment options.
Depending on your money needs, a bridge loan could be a great alternative. Find out how it works to solve the temporary financial demands placed on your business.
Timing Is Everything
If you’re not monitoring the health of your business, your business loan request may come at a bad time. Once your business begins to suffer, you become a greater risk for loan default. And without financial stability, you may face an immediate loan application denial.
Also, the more desperate you become the more likely you are to make all of these mistakes. Pressure to try and save your business may cause you to not compare loans. Or you could find yourself accepting a loan with an interest rate and repayment amount you simply can’t afford.
Business Loan Application Mistakes
Poor business planning and preparation leads to costly business loan application mistakes. Don’t have your dreams ruined by having your loan application denied. And even if it’s approved, make sure you understand the terms and conditions of repayment.
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